Best Buy to shrink big boxes; concerns linger

Dhanya Skariachan

4 Min Read

NEW YORK (Reuters) - Best Buy Co Inc said it will boost its Web presence, shrink some larger stores and open more of its smaller U.S. stores to try to win back market share from the likes of Amazon.com Inc and Wal-Mart Stores.

The news came after many investors had raised concerns about the retailer’s huge overhead costs and oversized stores at a time when many shoppers go online to buy gadgets. But the plans outlined on Thursday did not assuage those concerns, and Best Buy shares fell 2.5 percent.

The largest U.S. consumer electronics chain has reported three straight quarters of same-store sales declines and forecast a fall in same-store sales in the current quarter, mainly due to its ailing television business.

“I do believe that a lot of their bigger box stores have to be downsized. If there was a disappointment, I was kind of hoping they would be even a little bit more aggressive than what they outlined.” RBC Capital Markets analyst Scot Ciccarelli said.

Best Buy has about 1,100 big-box stores, which range from 20,000 square feet to 58,000 square feet in size, for a total of 42.4 million square feet.

The company expects that cutting U.S. “big box” square footage by 10 percent over the next 3 to 5 years will generate annual savings of $70 million to $80 million.

“It’s not that big for this company. What I think you really need to do is maybe downsize a little bit quicker,” Ciccarelli said.

“We believe the Street wants more. We look at this as a first step that shows us the company is looking at reductions,” Janney analyst David Strasser said.

LOOKING ONLINE FOR GROWTH

On Thursday, Best Buy said it wants to double its current $2 billion online business within 3 to 5 years.

Dunn also expressed optimism about potential online taxation reforms that aim at expanding the collection of sales taxes on items bought over the Internet. That would prevent online-only retailers such as Amazon from having an advantage over traditional chains.

“We believe it’s just a matter of time before this field is leveled,” Dunn told analysts and investors.

BRICK-AND-MORTAR MATTERS

Industry experts have long urged Best Buy to shrink larger, older stores as many shoppers increasingly buy gadgets online.

“These (large format) stores were built for another era in consumer electronics retailing,” Craig Johnson, president of Customer Growth Partners, told Reuters last week. “These stores, unless they are radically reconfigured or shrunk, are white elephants.”

Best Buy’s Dunn defended its brick-and-mortar presence.

“Stores ... augment the online presence,” Dunn said, highlighting the importance of knowledgeable associates while trying to sell new gadgets.

Best Buy is now aiming for 600 to 800 Best Buy Mobile stand-alone stores in the United States within five years, even as it cuts U.S. “big box” store square footage by 10 percent over the next three to five years.

In February, the company had announced plans to open about 150 of the small stores specializing in smartphones, taking the total of Best Buy Mobile stand-alone stores to about 325 in the United States by the end of fiscal 2012.

The retailer also plans to invest more in its profitable Chinese brand, Five Star, hoping to more than double its revenue in China to $4 billion within five years. It sees a total of 400 to 500 Five Star stores in the next five years.

“They still anticipate growing aggressively in China. We think that is unnecessary, but it clearly is getting strong returns and perhaps sets them up to sell it in the future for a strong return on investment,” Janney analyst David Strasser said in a note.

Best Buy shares closed down 79 cents, or 2.6 percent, at $29.46 on the New York Stock Exchange trading.